Tracking your expenses is the foundation you need to take control of your finances.
It’s the building block for creating those smart money habits you are dreaming of.
But, unfortunately, many of us don’t want to know where our money is going nor are we interested in spending the time logging in all of our expenses. But I like to argue that tracking your expenses is worth every bit of energy you put into it.
So why is it important to track your expenses?
It’s simple. Tracking your expenses removes the blindfold and allows you to understand exactly where your hard-earned money is going. By tracking your expenses, you will be able to cut spending and start meeting your savings goals. You will start to take control of your money.
Let’s dive into what tracking your expenses means and why it will benefit you to give it a try.
What Does It Mean To Track Your Expenses?
Tracking your expenses can be as simple or complicated as you like. But in the end, it’s simply collecting all of the information you can about your spending habits and categorizing them.
By doing so, you will create a picture of what your money is doing for you right now.
And with that picture, you will be able to start to make sound money decisions based on real information and not just a gut feeling.
Benefits Of Tracking Your Expenses
1. Create Financial Awareness
Keeping track of how you are spending your money is eye-opening.
Instead of avoiding your truth, tracking your expenses exposes your spending habits.
And only by exposing your spending habits can you start to align your money with your priorities.
Because if you don’t know where your money is going, you have no idea if your hard-earned money is helping you live the life you want.
By creating awareness around your finances, you are arming yourself with some pretty powerful information. This information will help you make financial decisions that make sense for you and your current priorities.
2. Control Lifestyle Inflation
Lifestyle inflation occurs when your standard of living increases as your income rises.
And it isn’t always a bad thing. No one wants to be eating ramen noodles and shacking up with six roommates as they did in their 20’s.
But it’s easy for lifestyle inflation to take us by surprise if we aren’t careful to control it. And it’s much easier to tackle lifestyle inflation before it happens instead of trying to cut back on expenses once they increase beyond our comfort level. I know this from experience.
This is where tracking your expenses comes in.
By tracking your expenses, you can bring to light those expenses that are starting to creep up. And once identified, you can make an intentional decision as to whether or not you want that expense to increase or not.
For example, maybe you notice that your grocery bill has been steadily increasing since you decided to buy more locally produced food. Once you notice this, make an intentional decision to allow the expense to increase because buying more locally-grown food aligns with your priorities.
On the other hand, if you noticed the increase in grocery spending is due to purchasing more convenience food, you may decide to nip this increase in the bud and change your grocery spending habits.
Knowing where your money is going allows you to control your lifestyle inflation instead of it controlling you.
3. Reach Your Financial Goals
Do you want to save for a house down payment or your child’s education?
When you know how much you are spending, and on what, you can set realistic savings goals.
If you don’t know how much you are spending, then setting savings goals is a shot in the dark. And this will lead to goals not being met, and ultimately a disappointment.
By understanding exactly how much money you have after paying your bills and funding your lifestyle based on your true priorities and intentions, you can accurately set saving goals for your future desires.
And the best part about this is that you will feel a sense of confidence in these goals because they are realistic.
4. Adequately Plan for a Financial Emergency
A common question in personal finance is “How much do I need in my emergency fund?” The common answer is 3-6 months of expenses.
But how do you know how much 3-6 months of expenses is if you don’t track your actual expenses?
Having a firm grasp on what your expenses are will help you accurately plan for a financial emergency.
Part of understanding your expenses is figuring out how much of your money is allocated to your needs versus your wants.
In an emergency, you must have enough money to cover your needs (the wants can wait) until you get back on your financial feet. Knowing the difference between your needs and wants will help you save only what you require to cover your needs. Thus, making the emergency fund smaller and a less intimidating number.
- Why I Didn’t Have an Emergency Fund Until I was 39 (Don’t make the same mistake)
5. Align Your Money With Your Priorities in Life
Simply gathering information on where your money is going each month will allow you to evaluate your spending. And, in turn, you will be able to determine if your money is serving your current life priorities.
Maybe you find that you are spending $500 per month on going out to eat, but struggling to save for a house down payment.
By exposing your spending, you can now make a decision that you feel good about it. You can cut back on going out to eat to increase your house down payment savings.
Or you can decide that a house isn’t aligned with your life priorities and you would rather enjoy a night out on the town.
The choice is yours. But you can’t make the intentional choice without pulling off the blindfold on our spending.
6. Take Control of Your Money and Feel Less Anxious
By not knowing where our money is going, we are allowing our money to control us. And when our money controls us, stress and anxiety follow. It’s a constant worry about whether or not we can pay our bills or afford that vacation we want to take.
A lot of the stress we feel around money is of our own doing. We do this by making financial decisions without seeing our full financial picture.
For example, we may purchase a new computer with money that was in our savings but forget that we need that money for the insurance bill that is due in a few months.
When you know how much money to allocate for your needs, you can spend your extra money stress-free knowing that you don’t need it for something else.
This is what it feels like to have control over your money. To make confident financial decisions anxiety-free.
Tracking Your Spending May Be The Hardest Part Of Your Financial Journey
The good news is that tracking your spending and exposing your spending habits and demons will likely be the hardest part of your financial journey.
Once you peel off the blindfold, taking control of your money becomes easier and easier.
During this journey, you may expose things you don’t want to see or know, and tough decisions may need to be made. But the light you start to shine on your money will guide you towards making stress-free money decisions that you can have confidence in.
Embarrassment and disappointment are only temporary. Have faith that you are giving yourself the tools you need to control one of the most important resources you have: your money.
How to Track Your Spending
There are several ways you can start tracking your spending today.
My suggestion is to start with a method that you think may work for you, try it out for a couple of months, and see how it feels. If it’s not working for you try another method.
1. Use a Budgeting Program or App
This is my favorite method because it’s what I found works for me.
There are several budgeting apps out there for you to try. Here are a few to try:
You Need a Budget (YNAB)
Based on the envelope method, YNAB teaches you not only how to put your money to work, but also a different way to think about money.
Cost: $12/month; $84/year
To learn more about YNAB check out my full YNAB Review.
Mint is a basic budgeting platform that can easily help you track your expenses.
I don’t necessarily like Mint for budgeting, but I do think it is a valuable tool if all you are looking to do is track your expenses for a few months.
2. Use a Spreadsheet
If you love a good old spreadsheet, this method may be for you.
Simply log in your expenses into a spreadsheet and categorize each expense.
At the end of the month, you will be able to see exactly where your money is going.
3. Pen and Paper
This is another quick and easy method.
For this method, you can either grab a blank notebook book and log in your spending or you can purchase a budget planner that has everything set up for you.
This budget planner by Clever Fox is a great way to start tracking your expenses.
You Got This
The benefits of tracking your expenses are vast.
The process will unveil some undesirable truths and tough choices. But ultimately, it will give you the control you need over your finances.
The information that you gather will be instrumental in helping you make confident money decisions.
Knowledge is power. And It’s up to you to take the leap and uncover that knowledge.
Don’t be scared of what might be hiding behind that curtain. It may be ugly, but it’s nothing you can’t handle.